Selling a Rental Held in Your Corporation: How the Gain Is Taxed Inside, and How the Untaxed Part Can Reach You
Before you list, know where the Income Tax Act puts the gain. It ends up in two accounts, and each one has its own way out of the corporation.
When a corporation sells a rental property at a gain, how does that gain get taxed and reach the shareholder?
The Income Tax Act tracks the gain in two separate accounts, and each one leaves the corporation in its own way. The capital dividend account in s.89(1) records the portion of a private corporation’s capital gain that is not a taxable capital gain. With a timely s.83(2) election, that balance can be paid as a capital dividend that no shareholder includes in income. The taxable capital gain (½ of the gain under s.38(a)) is taxed in the corporation. For a Canadian-controlled private corporation, the Act adds 10 2/3% under s.123.3 and builds a refundable balance using 30 2/3% of aggregate investment income. Under s.129(1) that balance comes back at 38 1/3% of taxable dividends paid, capped by the balance.
Source: Income Tax Act, ss. 38(a), 83(2), 89(1) “capital dividend account”, 123.3, 129(1), 129(4) (Justice Laws Website, Act current to 2026-09-30)
I’m Arthur Zhao, a Toronto real estate Broker. Picture an owner whose holding corporation has held a rental for years. We are going through the listing paperwork, and before signing they ask: “Once this sells, can I just take the money out?”
It is a reasonable question, and the honest answer is that the sale price itself doesn’t settle it. The corporation sells, so the gain belongs to the corporation. When that money moves to you, it moves as a dividend, and the Income Tax Act decides what kind of dividend it can be. Part of the gain sits in an account the Act built so it can reach shareholders without being included in their income. The rest is taxed in the corporation first. If the corporation is Canadian-controlled and private, rules refund part of that tax when it pays taxable dividends.
This article walks through those statutory mechanics in the order an owner asking that question wants them: the tax-free route first, then what happens to the taxable part, then what a missed or oversized election costs. It is not tax advice for your corporation. The numbers depend on its history, and that is your accountant’s work.
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The account you are really asking about: the capital dividend account
According to the Income Tax Act (Justice Laws consolidation current to 2026-09-30), the capital dividend account (CDA) is defined in s.89(1). Its core addition is the amount by which a corporation’s capital gain from disposing of a property exceeds the portion of that gain that is its taxable capital gain. Since s.38(a) makes the taxable capital gain ½ of the capital gain, the CDA picks up the other part, the part the Act does not tax.
Two limits come straight from the wording. First, the account belongs to a private corporation: it counts dispositions in a period that starts at the beginning of the corporation’s first taxation year that began after it last became a private corporation. Second, the period ends immediately before a particular time, which is the moment the account is being measured.
The CDA is also not a one-item account. The definition contains other additions, and it is reduced by the portion of capital losses that is not an allowable capital loss and by capital dividends that have already become payable. Its balance on any given day depends on the corporation’s whole record since it last became private.
The s.83(2) election: how the CDA actually leaves
A balance in the CDA does nothing by itself. Under s.83(2), when a dividend becomes payable by a private corporation, the corporation may elect in respect of the full amount of the dividend, in prescribed manner and prescribed form. The CRA’s form for this is T2054, Election for a Capital Dividend Under Subsection 83(2).
The timing is in the subsection: the election is made at or before the time the dividend becomes payable, or the first day any part of it is paid if that day is earlier.
When the election is made, two rules apply:
- s.83(2)(a): the dividend is deemed to be a capital dividend to the extent of the CDA immediately before that time.
- s.83(2)(b): no part of the dividend is included in computing the income of any shareholder.
So the answer to “can I take the money out” is partly yes. The CDA portion can reach you outside your income, but only through a dividend that is properly elected, and only up to the balance at that moment.
⚠️Timing is part of the election itself. Under s.83(2) the election is due at or before the time the dividend becomes payable, and the CDA is measured immediately before that same moment. A dividend that becomes payable before the sale has been counted cannot draw on this sale’s gain.
💡 My own view: treat this sale’s gain as one entry in a running ledger, not as the amount you can elect. s.83(2)(a) measures the CDA immediately before the dividend becomes payable, and the s.89(1) definition counts everything since the corporation last became private: capital dividends already paid come off, and so does the non-allowable part of earlier capital losses. A corporation that sold another asset at a loss, or paid a capital dividend years ago, can have a smaller balance than this sale alone suggests. Ask for the current balance before anyone picks a dividend amount.
The taxable capital gain: what stays and gets taxed inside
The other account is the taxable one. Under s.38(a), the corporation’s taxable capital gain is ½ of its capital gain, and that amount is taxed in the corporation’s hands. For a Canadian-controlled private corporation (or a substantive CCPC), the Act adds two refundable-tax mechanics on top:
- s.123.3 adds an amount equal to 10 2/3% of the lesser of the corporation’s aggregate investment income and a taxable-income measure set out in that section.
- Aggregate investment income, defined in s.129(4), includes in paragraph (a) the eligible portion of the corporation’s taxable capital gains for the year, net of the eligible portion of its allowable capital losses and certain net capital loss deductions.
- The s.129(4) definition of non-eligible refundable dividend tax on hand starts from the least of several amounts, one of which is a formula built on 30 2/3% of aggregate investment income. The definition has other terms and limits.
That balance is not lost. According to s.129(1) of the Income Tax Act (2026 consolidation), when the corporation pays taxable dividends, the Minister may refund an amount based on 38 1/3% of those dividends, limited to the relevant refundable dividend tax on hand at year end. The subsection also requires the corporation’s return for the year to be filed within 3 years after the end of the year.
These are the statutory ratios only. I am deliberately not combining them into an all-in corporate rate. Provincial tax also applies, and the actual result depends on the corporation’s own numbers.
An election made on time vs a late or excessive one
How the late-election and excess rules work
Late elections. s.83(3) lets a missed s.83(2) election count as if it had been made on time, if three conditions are all met: it is made in prescribed manner and form, the corporation pays an estimate of the penalty when it makes the election, and the directors (or whoever is legally entitled to run the corporation) authorized the election before it was made. Under s.83(3.1), the Minister may also request a late election in writing. If the corporation doesn’t comply within 90 days of being served, s.83(3) no longer applies to that election.
Excessive elections. Because s.83(2) is an election on the dividend’s full amount, a dividend larger than the CDA does not simply shrink to fit. Under s.184(2), the corporation pays tax equal to 3/5 of the excess. s.184(3) offers a repair: by electing within 90 days after the notice of assessment for that tax is sent, the corporation can have the excess treated as a separate dividend. Part of it can then be made the subject of its own election, and the rest is treated as a separate taxable dividend. Under s.184(4) that repair is valid only with the concurrence of the corporation and of every shareholder who received or was entitled to the original dividend and whose address the corporation knew. It also has to be made within 30 months after the original dividend became payable, unless each of those shareholders concurs.
Held in a corporation vs held personally: the same gain, a different route
s.38(a) applies to “a taxpayer”, so an individual who sells a rental at a gain also has a taxable capital gain of ½ of the capital gain. The difference is the route. When you own the property personally, the gain is reported on your own return and there is no second step. When the corporation owns it, the gain is first the corporation’s, and money reaches you through payments from the corporation, such as a dividend. That second step is why the capital dividend account and the refundable-tax rules exist.
The s.89(1) CDA belongs to a private corporation, and an individual has nothing like it. Nothing in these sections says one structure is better. The comparison depends on facts the statute doesn’t supply: how the property was acquired, what else the corporation owns, and who the shareholders are.
One more boundary. This article covers the capital gain only. If capital cost allowance was claimed on the building, s.13(1) deals separately with recaptured depreciation, which is included in income. Ask your accountant how that applies to your corporation.
ℹ️This article explains how the Income Tax Act sections work. It doesn’t calculate tax for any corporation. Before the sale closes and before any dividend is declared, have your accountant work through your corporation’s own figures, including the CDA balance and provincial tax.
What to line up, in order
These are steps to take with your accountant. Each one points back to a rule above.
- ☐Confirm whether the corporation is a private corporation, and whether it is a CCPC; the CDA and the refundable-tax rules depend on those statuses.
- ☐Ask whether capital cost allowance was claimed on the building, so recapture under s.13(1) is planned for separately.
- ☐Request a current CDA balance that reflects past capital dividends and earlier capital losses, not just this sale.
- ☐Fix the date the dividend will become payable; that date is the s.83(2) deadline.
- ☐Size the dividend against the CDA as it will stand immediately before that date, since the election covers the full amount.
- ☐Prepare form T2054 so the election is made at or before the dividend becomes payable.
- ☐Keep the election and the CDA computation together with the corporation’s records.
- ☐If a notice of assessment shows Part III tax for an excessive election, note the 90-day window under s.184(3) and line up shareholder concurrence under s.184(4).
- ☐If an election was missed, discuss a s.83(3) late election, and answer any written CRA request under s.83(3.1) within 90 days.
- ☐Check that the corporation’s return is filed within 3 years after year end, the condition for a s.129(1) dividend refund.
- Income Tax Act, s.38 (taxable capital gain)
- Income Tax Act, s.83 (capital dividend election, late elections, penalty)
- Income Tax Act, s.89(1) (definition of capital dividend account)
- Income Tax Act, s.123.3 (refundable tax on CCPC investment income)
- Income Tax Act, s.129 (dividend refund; definitions)
- Income Tax Act, s.184 (tax on excessive elections)
- Income Tax Act, s.13 (recaptured depreciation)
- Canada Revenue Agency, T2054 Election for a Capital Dividend Under Subsection 83(2)
Buying a Rental Property Through a Corporation vs Your Personal Name in Ontario: The Real Trade-Offs →Selling a Rental Property in Ontario: Capital Gains and CCA Recapture Explained →There Is No Canadian 1031: The Section 85 Rollover That Defers the Gain When You Move Commercial Property Into Your Corporation →The Ontario Selling Blueprint →
Frequently Asked Questions
Can my corporation pay a capital dividend from the rental sale before the sale closes?
s.83(2)(a) measures the capital dividend account immediately before the dividend becomes payable, and s.89(1) counts gains from dispositions in the period ending at that moment. A dividend that becomes payable before the property is disposed of cannot draw on that sale’s gain. When the disposition happens for tax purposes is a question for your accountant.
Do I have to include a capital dividend in my personal income?
No, if the corporation made a valid s.83(2) election. s.83(2)(b) says no part of the dividend is included in computing the income of any shareholder, subject to anti-avoidance rules such as s.83(2.1). Only the part within the CDA is a capital dividend, though, and a corporation that elects on more than its CDA owes tax on the excess under s.184(2).
Does a loss on another property the corporation sold reduce what can be paid tax-free?
It can. The s.89(1) definition of the capital dividend account subtracts the part of a capital loss that is not an allowable capital loss. So an earlier loss can offset part of what this sale adds. Capital dividends already paid come off the balance too.
What happens if the CRA asks my corporation to file a missing capital dividend election?
Under s.83(3.1) the Minister may request, in writing, that a late election be made. If the corporation doesn’t comply within 90 days of service, the s.83(3) late-election relief no longer applies to that election. If it does file late, s.83(4) sets the penalty at the lesser of 1% per annum of the dividend per month or part month, and $500 × months/12.
Is the gain taxed differently if I own the rental personally instead?
The inclusion rate is the same: s.38(a) makes the taxable capital gain ½ of the capital gain for any taxpayer. The route is what differs. A personally owned property’s gain is reported on your own return. A corporation’s gain reaches you through payments from the corporation, such as dividends, which is where the s.89(1) capital dividend account comes in. Your accountant can compare the two for your facts.
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